Banking, Financial Services, and Currency

In the 1980s, Jamaica had a well-established financial system that
was expanding. Since 1962, the number of financial institutions had more
than doubled to over forty, including the country's central bank,
development finance banks, commercial banks, trust companies, merchant
banks, building societies, insurance companies, peoples cooperative
banks, finance houses, and credit unions. The government's economic
policies in the 1980s favored greater use of monetary factors to
influence the economy and tighter credit policies than previously used
so as to restrain inflation.

The Bank of Jamaica was established in 1960 as the country's central
bank. It was formed to replace the Currency Board, whose lack of
authority to control the money supply had prevented the use of monetary
policies. The bank issued currency, regulated the banking system, set
minimum reserve ratios, adjusted liquid reserve ratios, established
discount rates, and generally controlled credit. As part of the
government's economic policies in the 1980s, the bank pursued a
restrictive credit policy to lower aggregate demand in the economy. The
tight credit policy was accomplished through higher reserve and
liquidity ratios, which in 1985 required commercial banks to retain 50
percent of their assets in a liquid form. Likewise, the prime lending
rate was maintained at high levels, reaching 23 percent in December
1985, or more than 10 percentage points higher than the prime rate in
the United States. Another monetary policy of the bank was the
devaluation of the Jamaican dollar to adjust the real rate of exchange
to more realistic levels. The bank devalued the Jamaican dollar numerous
times in the 1980s, lowering the exchange rate several times over its
value in the 1970s. These policies were designed to help reduce the
balance-of-payments deficit by making exports more competitive.

As a result of the historical reluctance of many commercial banks to
make medium- to long-term loans, several government banks were created
to finance economic development. The most important such
government-sponsored bank was the National Development Bank of Jamaica.
Other government banks supplying credit to specific sectors of the
economy included the Jamaica Mortgage Bank, the Agriculture Credit Bank,
the Jamaican Industrial Development Corporation, the Small Business Loan
Board, and the Workers Savings and Loan Bank. These banks generally
offered favorable interest rates and some technical assistance where
appropriate.

There were eight commercial banks in Jamaica in 1985, all of which
were originally or remained foreign owned. The British Barclay's Bank
was the first commercial bank on the island, established in 1836 to
finance the sugar industry. It was followed by three large Canadian
Banks, which eventually came under local ownership and were renamed the
Bank of Nova Scotia Jamaica, the Royal Bank of Jamaica, and the Bank of
Commerce Jamaica. In the 1960s, American banks such as Citibank and
Chase Manhattan Bank also entered the island. Barclay's Bank, later
named the National Commercial Bank, was bought by the government in the
1970s; the government returned the bank to private hands in 1987,
however. In 1985, 63 percent of all private-sector assets in major
financial institutions were found in the commercial banks. Throughout
the 1980s, commercial banks made three to four times more loans to the
private sector than to the public sector. Loans were distributed
approximately as follows: 25 percent to manufacturing, 20 percent to
construction and land development, 16 percent to agriculture, 12 percent
to transport, storage, and communications, and the balance to various
other sectors.

Life insurance companies, building societies, trust companies, and
merchant banks were other prominent financial institutions in Jamaica.
Their share of private-sector assets ranked 19 percent, 7.4 percent, 7
percent, and 4 percent, respectively. In 1985 there were over twenty
insurance companies in Jamaica, most of which held assets in large
foreign firms. Insurance companies played an important role in building
savings for investment in the economy. Building societies, all locally
owned, were less numerous than insurance companies and generally
attracted smaller savings to finance mortgages. Trust companies lent to
commercial banks, provided trustee services, and held time deposits.
Merchant banks functioned to underwrite securities, finance external
trade, and offer managerial advice to industry. Several new merchant
banks were established in the 1980s, including the Falcon Fund and the
Export-Import Bank.

The Jamaican Stock Exchange, the oldest in the Caribbean, was
established in 1969 under the direction of the Bank of Jamaica. Only a
small percentage of the country's capital assets were traded on the
original exchange, as most companies were either foreignowned or purely
family-run businesses. The number of shares traded grew rapidly in the
mid-1980s; these included the shares of some new publicly owned
companies. As of early 1987, only thirty-nine companies were listed on
the exchange. The exchange's performance in 1985 quadrupled the
performance of 1984. In 1985, 37.6 million shares were traded for
US$21.3 million compared with 9.7 million shares for US$7 million in the
preceding year. From 1981 to 1986, the exchange's composite index
increased 129 percent, standing at 1,499.87 by the end of 1986. A major
cause of the rise was the increasing number of companies that issued
public equity shares, rather than relying on commercial banks, to raise
capital.

The Jamaican dollar became legal tender when it superseded the
Jamaican pound in 1969. Because of tourism, United States, Canadian, and
British currencies also circulated, and illegal black markets were
common. Many of the tourist hotels listed prices only in United States
dollars because of the greater stability of that currency. Eastern
Caribbean dollars (EC$ (the joint currency used by members of the
Organization of Eastern Caribbean States (OELS-- see Glossary) and
pegged to the United States dollar at ES$270 equals US$1.00) were also
visible. The value of the Jamaican dollar was tied to the British pound
sterling until 1973, when it became pegged to the United States dollar.
In the process, the Jamaican dollar moved from being the strongest
currency in the Commonwealth Caribbean to being one of the weakest.
After experiments with various types of exchange rates in the 1970s,
exchange rates were unified in November 1983. Beginning in 1984, foreign
exchange was allocated through a twice weekly foreign exchange auction
system.